Are Small Businesses Punishing Groupon?

Deborah Caldwell|Senior Editor, Enterprise

Tuesday, 14 Aug 2012 | 6:55 PM ETCNBC.com

SHARES

Shares of Groupon, the daily deals company, were hammered on Tuesday, as second-quarter revenue came in below analysts’ expectations. The stock is now down almost 70 percent from its initial public offering price last November.

None of this comes as a surprise to some of the small businesses that signed on with Groupon and then watched their profits nose dive.

One such business owner is Jessie Burke of Posies Café in Portland, Ore. She describes her decision to work with Groupon as “the single worst decision I have ever made as a business owner thus far.”

“After three months of Groupons coming through the door, I started to see the results really hurting us financially,” she wrote in a blog post. “There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign. We literally had to take $8,000 out of our personal savings to cover payroll and rent that month.”

Posies isn’t alone. Back Alley Waffles, a restaurant in Washington, D.C., shut its doors in July after about three months in business — and it, too, is blaming Groupon.

“It was Groupon that broke our backs,” Back Alley Waffles owner Craig Nelson wrote on his website. “As we waited and waited for our money (how can it take 10 days to "process" a check? I can write one in 20 seconds flat) that thousand dollars loomed larger and larger until, finally, it snuffed us out.”

(To recoup losses, the company website proclaims it is charging $450 each for waffles by appointment.)

In both cases, the small businesses complained that Groupon didn't pay money owed to them in a timely manner. Instead, with foot traffic surging and demands for discounted food growing, the two businesses said they had to front the cost of menu items and additional labor without the money Groupon owed them.

Groupon defended itself on Back Alley's site, writing, "According to our records, only 132 Groupons, or 18 percent sold, have been redeemed since Back Alley ran two months ago, and Mr. Nelson has received 2/3 of his share of the revenue to date. We always hate to hear that a local business has decided to close, but the math does not point to Groupon as the cause."

So is the public relations anger drummed up by small businesses like Posies Café and Back Alley Waffles punishing Groupon’s stock?

Charley Moore, founder and executive chairman of Rocket Lawyer, says it's possible. "The securities markets are based on trust. Unfortunately for Groupon, the gravitational pull it’s under is that trust has been eroded. And dealing with those twin issues of investors discounting the stock and lawyers looking for potential ways that the company engaged in unlawful activity....they’re going to have to deal with that for some time in the future and trust is a hard thing to regain once it’s lost.”

In April, Groupon settled a class-action lawsuit about expiration dates on Groupon's deals and how the company sold or advertised those deals. That may not be the last.

“Certainly there is the possibility of another class action suit where the small businesses are a class and they may allege something in terms of disclosure or breach of contract,” said Moore, whose company is itself a small business. “And any time a stock falls as precipitously as Groupon, you’re going to see litigation risk.”

Members of the National Federation of Independent Businesses, however, are apparently uninterested in Groupon’s impact on small businesses — or their members’ impact on Groupon.

“When we ask our members what’s important to them, what’s pressing, the top of that list is always the same — healthcare, tax, and regulation,” said Jean Card, vice president of media and communications. “Maybe you’d call them more macro challenges, which always trump the micro challenges.”

Groupon grew rapidly as a private company by offering big daily discounts on local services, such as restaurants, to millions of online subscribers. Groupon, however, is part of a group of Internet and social media companies, such as Zyngaand Facebook, that debuted with fanfare but have fizzled since.

"A sequential decline implies a rapidly deteriorating core business, i.e. the daily deals business, and Groupon needs to act fast to fill up this hole with new initiatives such as Goods," Citi Investment Research analyst Mark Mahaney told Reuters on Tuesday.

Still, a new study by Rice University seems to show that the daily deal industry isn’t slowing down.

On one hand, less than half of the businesses running their first daily deal report profitable promotions. But the percentage of businesses making money jumped by about 6 percent in the May 2012 sample — from 55.5 percent (spring 2011) to 61.5 percent, according to the study published by Utpal Dholakia of Rice’s Jones Graduate School of Business.

“Daily deal promotions appear to be sustainable marketing programs for about one-third of the businesses that try them,” Dholakia said.